LESS EXPOSURE IN IRAN: GERMANY DECREASES EXPORT

C O N F I D E N T I A L SECTION 01 OF 02 BERLIN 000335

SIPDIS

SIPDIS

STATE FOR T, E, ISN/RA, EB/ESC, NEA/IR, EUR/ERA, EUR/AGS

E.O. 12958: DECL: 02/16/2017
TAGS: EFIN ETTC GM PREL IR EPET ETRD
SUBJECT: LESS EXPOSURE IN IRAN: GERMANY DECREASES EXPORT
CREDIT GUARANTEES

REF: A. BERLIN 272


B. BERLIN 273

C. BERLIN 274

D. 2006 BERLIN 2593

E. 2006 BERLIN 1495

F. 2006 BERLIN 649

G. 2005 BERLIN 1745

Classified By: Minister-Counselor for Economic Affairs Robert F. Cekuta
, for reasons 1.4 (b) and (d)


1. (C) Summary: EMIN and Econoff met with Dr. Hans-Joachin
Henckel February 12 to discuss Germany's policy regarding
export credit guarantees for German companies doing business
with Iran. Henckel said official export credit guarantees
for 2006 dropped to 900 million euro compared to 1.6 billion
euro in 2005. He expects the downward trend to continue in

2007. According to Henckel, the tense international
political situation has raised costs of doing business in
Iran and has made firms more careful about doing business
there. He saw no demand for increasing the current level of
exposure in Iran. Henckel stated that the German government
examines each application thoroughly for export credits to
ensure the good will not support Iran's proliferation
programs. Since November 2006, German government regulations
have added additional criteria, which exporters must follow.
Henckel noted the good cooperation between other export
credit issuing countries, stating each has become more
cautious when issuing credits for projects in Iran. End
Summary.

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German Exposure in Iran Drops in 2006
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2. (C) Discussing the current state of official export credit
guarantees, Henckel said the amount issued by Germany's
lending institutions in 2006 was 900 million euros, a drop of
over 40 percent from 2005. Henckel said the reason behind
the significant decrease was the increased political risk.
He noted the OECD decision to drop Iran from category 4 to
category 5 last year reflected the international view that
Iran's president is a destabilizing force in the region.
Henckel said the increased cost of doing business in Iran --
through the rising risk premiums -- and the current political
crisis have made the business community more cautious about
undertaking new business in Iran. He said banks have no
interest in increasing exposure at the current time, and the
German government continues to examine each export project
carefully. He expects the volume of German export credit
guarantees to drop further in 2007, assuming there is no
change in Iranian politics.


3. (C) Henckel said the criteria for approving export credit
guarantee applications remain strict and consider a variety
of factors. The good being exported, what its end-use is,
and the company's track record with adhering to the list of
non-exportable goods all play into whether the government
approves the application. The government sends them a
"Letter of Awareness" which explains the exact criteria to
which exporters must adhere, according to Henckel. He noted
that in November 2006, the German government increased the
punitive measures associated with violating export
regulations. Should German exporters chose to disregard
export regulations, they risk losing the coverage provided
through the export credits.

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Business Reaction
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4. (C) Business reaction has been reserved on the tightening
of export credit guarantees and efforts to limit commerce
with Iran. Henckel stated most of the criticism comes from
businesses which have existing business relations with Iran
or have only begun conducting business within the last three
to four years. He also thought business' criticism stemmed
from concern that competitors will take contracts or projects
previously held by German companies. Henckel cited Chinese
companies as an example, saying the Chinese have no
compunctions about financing these same projects/sales. He
said the Iranians, instead of looking to Germany as a
supplier, are now turning to China for cranes and
manufacturing equipment. According to Henckel, the Iranian
government has approved this purchasing strategy.


BERLIN 00000335 002 OF 002


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Transparency in the Export Credit Market
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5. (C) Although there is intense competition among countries
issuing export credit guarantees, Henckel said there also is
a high level of transparency when deals concern Iran. He said
he talks with his counterparts in Italy, Japan, Austria, and
Britain about transactions involving Iran. The trend for
issuing export credit guarantees to Iran is downward, Henckel
said, as none of these countries' export credit agencies want
to increase exposure there.
TIMKEN JR